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Save Early, Often to Calm Retirement Chaos

For many years, baby boomers and other workers looked at their homes as giant piggy banks. Rather than saving for retirement, they assumed rising home values would bail them out in their golden years.

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But since 2008, a "huge paradigm shift" has made the road to a secure retirement much rockier, according to Jill Vihtelic, professor of business at Saint Mary's College in Notre Dame, Ind. Vihtelic says the best way to prepare for an "uncertain future" is to spend less and invest your savings. And the sooner you start your retirement planning, the better.

America's retirement crisis is well-documented in studies and surveys. Why do you suppose this is a problem? Is it due to Americans' penchant to spend rather than save?

I don't think that the problem is as simple as that; we have suffered a huge paradigm shift. Americans are net savers over their lifetimes. As Elizabeth Warren (current Senate candidate, longtime consumer advocate and former special adviser to the Secretary of the Treasury for the Consumer Financial Protection Bureau) has said, most people invested in their homes and built equity as their main retirement asset.

As it turns out, that investment lost value since 2008. Homes are still quite hard to sell and illiquid in many locations, and most real estate experts will tell you that we're not through all of the foreclosures yet.

Other economic, societal and demographic shifts -- such as stagnant incomes, increased divorce rates, the number of grandparents raising grandchildren, rising medical costs, increased life longevity, et cetera -- contribute to the financial difficulties that many people now face as they reach retirement age.

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What can Americans do to improve their retirement prospects at various points in their careers?

Regardless of where people are in their careers, to be prepared for an uncertain future, we should spend less than we earn and invest the difference. And the sooner people start, the better. Longer periods of time make achievement of financial goals more feasible due to the time value of money. (Editor's note: "Time value of money" is the value of money based on a specific amount of interest earned over a specific period of time.)

There's been a lot of talk lately about the demographic shift in many developed countries. Because of the shift to an aging population, an economic slowdown is forecasted in those countries. Do you think aging populations and economic slowdowns go hand in hand?

I'm not sure that I agree with the statement or its premise. Aging populations will provide growth to many industries such as health care products and other service sectors. In the U.S., the boomer generation is so massive that it drives consumer demand. What boomers want and need as they age will undoubtedly be a different mix of products and services compared to when they were in their 20s, 30s or 40s.

Should Americans invest retirement money more in emerging markets than they have in the past, since countries that are not yet mature have more growth potential?

Emerging markets provide growth opportunity and add diversification to investment portfolios. That said, however, they have increased risks such as currency and political risks. Whether more money or any at all should be invested in one's retirement portfolio has a lot to do with the individual investor's risk profile and expected holding period.

What's the right amount of money that people should save for retirement on a percentage basis? Should it be 10 %, 15 %, 20 %?

There is no magic formula. Time value of money rewards early saving and investment. For example, people in their 20s with 50 years to work can achieve retirement goals with a much smaller investment compared to their parents who are in their 50s with only 20 years left (until) retirement. Assuming 5 % annual interest compounded monthly, a monthly investment of $375 grows to $1 million in 50 years. To achieve the same $1 million goal over 20 years requires a monthly investment of $2,433.

We would like to thank Jill Vihtelic, professor of business at St. Mary's College in Notre Dame, Ind., for her insight. Questions for this interview were contributed by Barbara Whelehan, assistant managing editor for Bankrate.com.